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Pound Holds Above Support

Daily Analysis - 05/06/2017

London Terror Attack Fails to Dent Sentiment

Even with the unnerving backdrop, the Pound is managing to hold above a key support against the US dollar. A weekend terror attack that killed seven people in London just days before the country goes to polls could however greatly impact the approaching general election as the Conservatives and Labour Party square off.

Theresa May Under Pressure

GBPUSD was last trading around 1.2865, just above the important support at 1.2840, a break below which would result in a reversal of the short-term trend downward. Investor reactions to the latest terror incident at a popular London nightlife spot is muted, as they await the results of a new opinion poll that could point to a further narrowing of the gap between the ruling Conservative and the opposition Labour Party.

The third terror attack in the UK in a span of three months has eroded incumbent Prime Minister Theresa May’s popularity notably, potentially resulting in an election day upset. If either party fails to secure an outright victory, it would create huge uncertainty just weeks before “Brexit” negotiations are scheduled to begin. Given the heightened risk environment, investors are more than likely to sit on the sidelines until the June 8th elections have concluded, potentially keeping the Pound trending horizontally.

US Job Growth Slows

Job creation in the US fell sharply in May, providing further evidence that the tightest labor market in years is making it difficult for employers to fill vacancies. The economy added a modest 138,000 new jobs last month while the unemployment rate fell to 4.30% according to data from the Bureau of Labor Statistics released on Friday.

Economists surveyed by Reuters had forecast nonfarm payrolls to increase by 185,000, with the unemployment rate holding steady at 4.40%. The drop in the overall unemployment rate however was largely the function of weaker labor force participation. Wage growth also disappointing, with May average hourly earnings rising at a mere 2.50% annualized rate and the average work week unchanged at 34.4 hours. Several economists however noted that May figures are prone to seasonality and often come in lower than expected. After reaching a new record Friday, S&P 500 futures are hovering around 2435.

China Services Sector Expands

Following the manufacturing disappointment last week, activity in the Chinese services sector managed to top expectations by a wide margin, growing at the fastest rate in four months during May amid a surge in new orders. The Caixin Services PMI reversed after a four month decline to rise to 52.8 last month from April's 51.5 - the highest reading since January.

The findings were in-line with data from last week’s official survey that also showed growth acceleration in the services sector, which accounts for over half of China's GDP. The new orders sub-index of the PMI surged to 53.5 in May from 53.0 in the prior month, indicating the strongest customer demand since December of last year. USDCNH is largely unchanged in early Monday trade following last week’s major Yuan appreciation, rebounding from support at 6.7720.

Canadian Trade Deficit Narrows

After dipping notably back in February, Canada's trade deficit has since narrowed, contracting in April as exports outpaced imports for the second straight month. Data unveiled by Statistics Canada on Friday showed that the merchandise trade deficit stood at a seasonally adjusted CAD$ 370 million compared to an upwardly revised CAD$ 936 million trade gap recorded back in March. Exports grew 1.80% in April to CAD 47.69 billion, while imports edged 0.60% higher to a record CAD 48.06 billion.

Meanwhile, the surplus with the US jumped to its highest point in nearly three years. For the month, Canada’s surplus relative to the US reached CAD$ 4.95 billion, with exports increasing 5.40% while imports improved 1.10%. The positive momentum is helping the Canadian dollar, extending USDCAD losses in early Monday trade as the pair trends around the 1.3475-mark.

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